We believe that without making a conscious and fundamental change in
the patterns of thought, structures and political and economic
institutions, the way out of the current crisis is unthinkable.

Behrouz Hadi Zonouz, Economist

Nearly 40 years have passed since the establishment of the Islamic Republic
of Iran. During this time, the country with widespread national support has
left behind heavy threats, especially the Iraqi imposed war. In addition,
important steps have been taken in line with general and academic education,
health improvement, adjustment of social inequalities and promotion of some
technologies and scientific advances. The high turnout of the people in the
presidential and parliamentary elections, despite the economic problems, has
been a major backbone for the stability of the establishment.

Unfortunately, today, the country is faced with huge political, economic,
social and cultural challenges concurrently. If these issues are ignored
this could result in further escalation of the economic crisis and could
spark popular protests.

It goes without saying that the coincidence of this situation with the
current international coalition of Iranís enemies could lead to large and
irreversible economic, social and political losses for the country. The
bitter reality is that these challenges have not been imposed on us only by
the enemies of the establishment; part of them is the product of the
decisions taken by the state managers as a whole. Although some of these
decisions have been focused on securing the interests of the powerful
stakeholders, unfortunately, many institutions and wrong policies have also
caused this situation. These institutions might have had good intentions but
misconceptions about good governance principles and public administration
have added fuel to the fire.

Therefore, we believe that without making a conscious and fundamental change
in the patterns of thought, structures and political and economic
institutions, the way out of the current crisis is unthinkable. To achieve
this task is difficult because on the one hand it requires a new and
scientific approach for analyzing the domestic and international situation
in terms of national interests and adopting appropriate policies in every
field, and on the other hand, there is a need for constructive interaction
between the state officials and civil and public institutions.

In the past, a number of economists, sociologists and politicians have
provided advice to the state officials at critical points by writing
collective and individual letters and scientific articles, but the
insistence of officials on continuing the false policies has caused
tremendous damage to the country... Despite the ignorance of these
recommendations, I believe that the current silence of scientific circles
and trade associations is not permissible. The state of the economy and the
society has made this author who has been working as a consultant of the
Research Center of the Majlis and various governmental agencies since the
2000s, to remind points for the information of the public and the
officials.

Brief Glance at Performance of Economy and Its Major Challenges

Over the past four decades (1976-2016), the population of the country has
risen 2.37 times, but the average GDP growth at the same time grew only 1.82
times. Thus, the countryís per capita production at fixed prices fell and
for the same reason, the peopleís level of welfare has declined in this
period. Also, our economic status in global production and trade has
dropped. Only in the last decade the average household expenditures has
fallen 17 percent at fixed prices.

Unfortunately, under the prevailing conditions, the prospects for economic
growth are not very promising, and it is certain that during the Sixth
Development Plan (2017/18-2021/22) we will not achieve the goals set for
economic growth, improvement of productivity of production factors and
reduction of unemployment. All evidence suggests that, at the end of the
projected period in the Vision Plan (2025/26), the country will not only
fail to surpass its regional rivals, but also our gap in terms of per capita
production and technology advancement will increase from Turkey, Saudi
Arabia and the United Arab Emirates.

During these long years, instead of paving the way for economic growth we
have put the emphasis on the policy of population growth and economic
self-sufficiency. As a result, population growth has taken over economic
growth and this has created serious challenges in the labor market. Although
the labor force participation rate in Iran was about 39% in 1395 (2016/17),
one of the lowest rates in the world, in this very year, the unemployment
rate and hidden unemployment rate in Iranís labor market are two digits.

Iran is a country with potentially large political, cultural and
economic capabilities that can be actualized.

The high unemployment rate among educated young people and women and in the
less developed regions of the country and the mismatch of education with
labor demand is another aspect of the challenges facing the labor market. In
the Iranian economy, in an optimal situation, the active population could
range from 55 to 60 percent, and the open and hidden unemployment rate could
be less than 10 percent. Given the experience of the past forty years, our
economic and social system has not been able to benefit from the demographic
window for promoting national production, and evidence suggests that it
would not be ready to take advantage of the opportunity in the near future.

The banking system in the Iranian economy plays a central role in mobilizing
short-term financial resources and facilitating capital accumulation. At the
same time, securities markets, which should be the main driving force in
turning the savings to investments, draw little attention. In the meantime,
unfortunately the banking system due to adhering to misguided policies and
weak supervision of the Central Bank is in a critical state. In most of the
banks, the ratio of capital to assets is negligible, arrears high, and a
significant portion of the bank assets are confined in real estate and
business.

At the same time, the expansion of the activities of illegal financial
institutions without respecting the banking principles and in the absence of
supervision by the Central Bank has led to a betrayal of depositorsí rights
and the loss of public confidence. The crisis has fueled an unhealthy
competition among banks to attract deposits and raised the banking interest
rates to an unprecedented level.

Obviously, in such a volatile financial situation, the provision of banking
services to the real sector for investment and the long-term sustainability
of banking activities will not be possible. If measures are not taken to
correct the balance sheet status of banks, sooner or later the financial
system of the country will be seriously damaged, and will take the real
sector to a state of stagnation with itself. Long term drought that has been
afflicting the country for almost a decade, along with impudence in natural
resources management (including payment of heavy subsidies to agricultural
inputs and water, and lack of supervision over the use of shared natural
resources), has led to widespread destruction of renewable natural
resources, including water and soil resources, forests and pastures,
wetlands, lakes and important habitats.

The water crisis has reached a critical point with the land subsidence in
most of the countryís important plains. In recent years, an increasing
number of farmers and residents of warm and dry areas have left their
villages to small and large cities. The shortage of water resources is so
acute that food security in the country is in danger, and farmers and city
dwellers in some areas for the first time after the Revolution have stood
against the responsible bodies and officials.

Pessimism towards the mechanisms of the market economy at the beginning of
the 1979 Revolution, led to the nationalization of the banks and large
domestic and foreign banks and corporations. In addition, the scope of
government interventions in the economy increased at an unprecedented level
in the form of enacting rules and regulations, introduction of a system of
financial incentives, pricing and quotation of goods and production inputs.
Although after the Iran-Iraq war (1980-1988), important steps were taken
towards privatization and reduction of government intervention in the
economy, Iranís economy is still far from a free economy. The truth is that
privatization in Iran took place in a way that very small shares of
state-owned companies and banks were transferred to the private sector
operating independent of the government.

Indeed, an important part of the state-owned corporations was handed over to
the Social Security Organization and the civil servants and military
personnel pension funds and another part was ceded to military and civilian
organizations.

Thus, a new capitalist class was born in Iran, which had a close
relationship with power centers. This capitalist class not only got rich
through buying public assets at low prices but overtook the private sector
by profiting from the rent derived from the surplus of land and urban real
estate. This type of capitalism is referred to in political economy as
relationship-based or friendship-based capitalism. Instead of using
innovation rents in the production and distribution of goods and services,
this group takes advantage of the economy at every opportune time.

The lack of proper institutional arrangements for establishing a market
economy and the formation of islands of conflicting interests as state
corporations, companies affiliated to non-governmental organizations, formal
and informal private sectors and unfavorable business environment have been
among the main causes of economic backwardness in the country. In 2017, from
among 180 countries, the global ranking of Iran in terms of economic freedom
was 155. While Turkey and Saudi Arabia ranked 60 and 64 respectively. In the
report, Iranís privilege in terms of investment freedom, financial freedom,
property rights, the effectiveness of laws and the veracity of government
action is very low.

The negative consequences of the dependence of our economy on oil, including
unproductive renting, weakening of the institutions that support development
and financial corruption, and the destabilizing effects of oil revenue
fluctuations, is another factor affecting the weak performance of the
economy. In 2016, Iran ranked 131 in terms of corruption perceptions index
among 176 countries. While the ranking of our neighboring Muslim country,
Turkey in the same year was 75. The reflection of what was said above can be
seen in the confused state of affairs in the business environment.

The experience of the last 40 years tells us; firstly, in the absence of the
internal coherence of the sovereignty and clean bureaucracy, we cannot have
a government independent of the exclusive interests and avoidance of harmful
deals between the public and private sectors. Secondly, without the
establishment of sustainable development institutions and policies, given
the characteristics of the Iranian society, one cannot be hopeful about the
success of the five-year development plans, the Vision Plan and the general
policies of the Expediency Council.

Iran is a country with potentially large political, cultural and economic
capabilities that can be actualized. Unfortunately, we have not been
successful in this respect in the past years. Since we know that by
implementing the said reforms, the interests of powerful groups within the
country will be jeopardized their negative response to these recommendations
is not unexpected.

Nevertheless, the Islamic Republic of Iran at this critical time should
adopt one of the following two options: Continuing the policies of the past
or accepting and implementing tough fundamental economic, social and ...
reforms with the participation of the vigilant Iranian people. The adoption
of the second option requires observance of the principle of priority of the
interests of the society to individual interests and a fundamental shift in
the worldview of the officials of the country. The government, in the sense
of a set of governing powers, plays a central role in the dignity of the
society.

Letís hope that this historic opportunity will not be lost due to ignorance
and our society will not suffer more than this.